How is IRR calculated?

There's no direct algebraic formula — IRR is found by numerically searching for the discount rate that makes NPV equal zero for the given cash flows.

When does IRR not exist?

If every cash flow is positive (or every one is negative), there's no discount rate that brings NPV to zero, so no real IRR exists for that cash flow pattern.

IRR Calculator

Calculate the Internal Rate of Return (IRR) — the discount rate at which a series of cash flows has a Net Present Value of exactly zero.

Initial investment (year 0, negative)

Year 1 cash flow

Year 2 cash flow

Year 3 cash flow

Internal Rate of Return

8.9%

How It Works

What IRR represents

IRR is the break-even discount rate for an investment — the rate at which the present value of returns exactly equals the initial investment. It's found by numerically searching for the rate where NPV equals 0.

Interpreting IRR

A higher IRR generally indicates a more attractive investment, and it's often compared against a required rate of return (hurdle rate) — if IRR exceeds that hurdle, the investment clears the bar.

Example Calculation

An investment of $1,000 returning $1,100 exactly one year later has an IRR of exactly 10% — the rate that makes NPV zero.

Common Mistakes

Assuming every set of cash flows has a valid IRR — if all cash flows are the same sign (all positive or all negative), there's no discount rate that makes NPV zero.
Comparing IRR alone between investments of very different sizes or durations without also considering NPV in dollar terms.

Frequently Asked Questions

How is IRR calculated?: There's no direct algebraic formula — IRR is found by numerically searching for the discount rate that makes NPV equal zero for the given cash flows.
When does IRR not exist?: If every cash flow is positive (or every one is negative), there's no discount rate that brings NPV to zero, so no real IRR exists for that cash flow pattern.